Thought I was Moderate but Actually Conservative?

[lucky3]

Been watching the board for several months now and really enjoy the feedback. So today at 66 and fully employed, I reviewed my AA to find the following:

40% Stock 20% Bonds & Fixed 40% Cash/CD's

If I should have my "age in bonds" than I'm way off the mark. To remedy that, I could transfer some of the cash to bonds...toTotal Bond Fund and/or Tips(of which I own none)....despite all the noise of a "bond bubble". I also own no international stock funds...ok, ok, don't yell at me, I know I'm violating one of the priciples it just that since I was burned by an activley managed international stock fund years ago I swore off going global.

One more thing, I have large positions in Vanguard 500 Index Fund and their Star fund....would the 500 index fund be a suitable replacement of their Total Stock Index Fund?

My large cash position actually shows how conservative I really am even though I always thought of myself as a moderate investor (even by Vanguard's AA tool).

Looking forward to hearing your thoughts...don't worry, I can take it!

Lucky3

[stan1]

40% cash is conservative, but the question of whether it is too conservative is unique to your situation. Do you have a pension you will mostly be able to live off when you do retire? Is your portfolio large enough that your needs will be met over you and your spouses lifetimes? There is no need to take more risk than you need to take to meet your objectives.

[bottomfisher]

I also own no international stock funds...ok, ok, don't yell at me, I know I'm violating one of the priciples it just that since I was burned by an activley managed international stock fund years ago I swore off going global.

Your Vanguard STAR fund actually has a fair amount of international equities. As you may be aware, STAR is fund of funds. 9.5% International Value, 9.4% International Growth. Also bit more international exposure in Morgan Growth, Windsor, Explorer funds it also holds

[foxfirev5]

At 57, I'm 45% equities / 40% bond and 15 % cash. However the bond portion is shorter duration and I really don't see much difference in yield between cash and bonds at this point. So I'm tempted to just say my AA is 45/55. I really don't feel this or your allocation are overly conservative.

[john94549]

If your "cash" is working (as in a CD ladder), then why not count that ladder as part of your bond allocation? If the "cash" is sitting in a savings or checking account earning next to nothing, then you might want to re-think that. Lots of threads lately on bond funds versus CD ladders.

[bottomfisher]

One more thing, I have large positions in Vanguard 500 Index Fund and their Star fund....would the 500 index fund be a suitable replacement of their Total Stock Index Fund?

I prefer VG Total Stock Market Index fund over S&P 500 Index fund. Over past 10 years, the TSM has returned 8.79% and S&P 500 Index fund returned 7.92% annualized. I presume the better performance is explained by the small cap exposure which have performed better than large cap stocks historically

[ourbrooks]

Doing "age in bonds" is not as simple as it might seem from the phrase. John Bogle clarified his original recommendation by explaining that one should take into account the present value of pensions and Social Security, considering them as bonds, when doing the calculation. Around the same time, he mentioned that he thought typical Social Security had a value in the neighborhood of $300,000. Interest rates have dropped a lot since then, and using current interest rates, I calculated that $20,000 a year of Social Security payments for a couple was worth more like $600,000!! For most investors, doing the calculation the way John Bogle recommends results in all or most of their investment portfolio beings in stocks!!

Leaving the "age in bonds" guideline for the moment, the real answer to the question as to whether you're being too conservative lies in how you plan on spending the money. If you plan on using it for regular living expenses, keep in mind that even at a below historical average 2.5% inflation rate, you'll still need to increase your spending by 28% every ten years. To keep up, your investments should return at least 2.5% a year. That used to be easy enough with bonds or even, CDs, but that's not so easy any more. On this forum, there are lots of people who are worried about interest rates rising and bonds dropping in value, but there's also a contrary school, typified by the people at Credit Suisse, who believe that interest rates are likely to stay below inflation for the next 6-8 years and will never return to their past historical levels. Either scenario is bad news for someone withdrawing living expenses from a mostly bond portfolio.

Does this mean you should rush out and put 90% of your portfolio in stocks? Nope, particularly if you see yourself as likely to panic and sell at the bottom when the market drops. On the other hand, you might want to plan on a much lower withdrawal rate from your portfolio.

[Peter Foley]

My first thought was that if you have sufficient savings to cover your retirement costs, then your current allocation is fine as it is. You have in effect "won the game" and it is OK to be conservative at this point in your life. I personally never took Mr. Bogle's "age in bonds" quote literally. I understood it to mean "age in non equities." I went to roughly age in bonds shortly before I retired and I divide the "bond" portion into Total bond, TIPs & I-bonds, and stable value.